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Overview

The openness of the United States to trade and technological innovation, as well as the flexibility of its labor market, has fueled impressive growth.

In such an economy, workers are routinely displaced. Most find new jobs in a reasonable amount of time. But for workers with a long tenure at their previous employer, these new jobs often pay wages much lower than those they earned before. For this group, displacement is much more than a temporary setback.

In The Case for Wage Insurance, Robert J. LaLonde recommends rethinking traditional trade adjustment assistance to address this problem. He argues that existing programs, including retraining and unemployment insurance, do too little to help displaced workers whose new jobs pay substantially less than their old ones. Unemployment insurance, for example, makes up for lost income during unemployment but not for reduced income after reemployment. To fill this gap, Professor LaLonde proposes to shift resources from existing programs to a displacement insurance plan—effectively, a generous earnings supplement for a number of years—for workers facing a long-term reduction in wages.

Ultimately, well-designed displacement insurance could ease long-tenured workers’ fears of job and income loss, thereby diminishing opposition to free trade and other policies perceived as at fault. In this way, it could help Americans continue to enjoy the benefits of trade and openness, and help the United States maintain its competitiveness and leadership in the global economy.

Part of the Bernard and Irene Schwartz Series on American Competitiveness.

More About This Publication

Robert J. LaLonde is a professor in the Harris School of Public Policy at the University of Chicago. Professor LaLonde first joined the University of Chicago in 1985, where he taught for ten years at the Graduate School of Business and the Harris School. From 1995 to 1998, Professor LaLonde served as an associate professor of economics at Michigan State University. He has been a research fellow at the National Bureau of Economic Research since 1986, served as a senior staff economist at the Council of Economic Advisers during the 1987–88 academic year, and was the deputy director of the Northwestern University–University of Chicago Joint Center for Poverty Research. He currently serves as a faculty affiliate with the University of Chicago’s Center for Human Potential and Public Policy.

His research focuses on six areas: program evaluation; education and training of the workforce; economic impacts of immigration on developed countries; the costs of worker displacement; the impact of unions and collective bargaining in the United States; and the consequences of incarceration on labor market and social welfare outcomes. Professor LaLonde received his PhD in economics from Princeton University.

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